Shipping Market Insight – Katerina Restis

11th june 2018

As observed last month the price of oil hit its highest level since November 2014 reaching $80 per barrel. Global oil demand growth for 2018 was slightly revised from 1.5mb/d to 1.4mb/d, bearing the effect of higher oil prices. The geopolitical turmoil has caused elevated concerns over potential disruption to supplies.

The decision of the U.S. President Donald Trump to withdraw from the nuclear deal and re-impose sanctions on Iran caused markets to price in the impact of deteriorated Iranian crude exports. In particular, Iran produces about 2.4m barrels a day accounting for 4% of global oil supplies. However, the European Union is firm on keeping the agreement alive and not to pose sanctions on Tehran. Further, the IEA has stated that they would examine whether other producers would step in and offset a disruption to Iranian exports.

Accordingly, last week Saudi Arabia and Russia announced that OPEC and other members intend to lift supply and revive oil production, to make up for impending losses from Venezuela and Iran diminished output. In reaction to such announcement last week oil prices declined with notable the longest run of losses since February, 2018. Respectively, with projections of oil supplies shrinking and trembling prices, the two nations consented to restore some of the oil output they had freeze.

OPEC and Russia produce more than 40% of the world’s oil. As per analysts and various producers inside OPEC, reaching an agreement in the upcoming OPEC meeting in Vienna seems challenging. It is argued that Saudi Arabia and Russia have nothing to gain from reduced output, and plenty to lose if oil prices continue last week’s sharp decline. According to IEA, since the 2016 agreed productions cuts, Saudi Arabia has decreased their daily oil output by almost 590k barrels per day, Russia 250k barrels and U.A.E. 141k barrels per day respectively. Overall the oil output cuts by OPEC and partners have brought oil supply and demand close to balance with IEA’s recent statement “mission accomplished” pretty much confirming this.

The economic and political distress affecting the oil-rich Venezuela has led to collapsing crude production even from the country’s mature oilfields. Such downfall in oil output has affected oil markets quicker than expected. The situation is disappointing as Venezuela’s oil industry is falling apart, while conditions in the country degrade, with increased corruption, problems with payments and equipment breaking down.  Furthermore, U.S. shale oil production is at record highs, with output doubling the last decade.

Iran and Venezuela are not the only foundations of geopolitical volatility causing disturbed oil prices. The ongoing acceleration of tensions between Saudi Arabia and Iran, continuing conflicts in Iraq, Libya, Syria and Yemen have significantly shaken the region. As reported, a direct military confrontation between Iran and Saudi Arabia is seen unlikely, while any degree of conflict intensification in the region would undermine stability. The IEA has advised that the recent geopolitical events have increased ambiguity over future global oil supplies. Worldwide, the economy is strong, with the IMF predicting 3.9% growth this year. Vigorous economic activity is an important feature in rising oil prices and thus we shall wait and see the outcome of OPEC and further members’ upcoming meeting and if an agreement will be achieved in reference to production output levels.

Source: TANKER CHARTERING/ INTERMODAL RESEARCH & VALUATIONS